Takeover bid faced with impossible headwinds

Ryanair’s failed third bid to take over Aer Lingus begs the question whether the move would be allowed under any circumstances.

The European Commission gave detailed reasons on why it has come out against this latest attempt by Ryanair to subsume Aer Lingus.

Ryanair and chief executive Michael O’Leary’s can-do attitude and their producing of an answer to every problem raised by the commission did not convince the competition experts in the end.

The commission clearly did not trust Ryanair’s solutions, which included writing a business plan for the company it would help set up in Ireland to take over the Aer Lingus name on the more contentious routes, give it €100m as seed capital, and provide it with staff and premises.

The final rejection of Ryanair’s bid leads to the inescapable conclusion that, as long as there are only two major airlines operating in Ireland, one will never be allowed absorb the other.

Leaving the country with just one airline would create a monopoly situation, the commission points out, which is what it is there to prevent.

Ryanair, however, recognised this as the main objection early on and responded by offering to help establish a new company, based in Ireland, to which it would transfer capital, lease several aircraft and airport slots, make a royalty-free, non-sub-licensable, non-exclusive and non-transferable license to the Aer Lingus trademark for three years, together with personnel, contracts, and real estate.

This company would be an offshoot of Flybe UK, the largest British regional operator, which has 73 planes. This compares with Ryanair’s 300-plus and Aer Lingus’s 44 planes.

This would have solved another problem Ryanair faced — the 46 routes on which it and Aer Lingus compete directly. They are the only two carriers serving 28 of these routes and taking Aer Lingus out would leave only Ryanair providing flights.

Ryanair came to an arrangement with Flybe to take over 43 routes for a minimum of three years, basing the aircraft in Dublin and one in Cork. Flybe’s involvement would ensure there were two companies offering consumers a choice, while Ryanair had got an undertaking from BA to take over three remaining such routes.

Ryanair had addressed concerns that Flybe could not afford such a service by offering to provide €100m to Flybe to establish the routes in addition to all the accoutrements of operating an airline.

However, Competition Commissioner Joaquín Almunia said they had examined this solution and found it wanting. He cast doubts on whether Flybe would be able to suddenly become an airline operating larger planes on more routes.

The service Flybe Ireland would offer would require it to develop a new business model, operate aircraft different to its own, taking off without any previous relevant experience operating out of Ireland, or competing with Ryanair.

Offering to write Flybe a business plan “was not reconcilable with the concept of independent competitors”, the commission said.

Despite Ryanair’s solution-driven offer of €100m to the airline, the commission said Flybe “did not appear to possess the financial resources necessary to maintain and develop Flybe Ireland as a viable and active competitor”.

It also believes the 43 routes Flybe would take over from Aer Lingus would not be profitable and so the company would not have sufficient incentive to continue to operate on a lasting basis, at least on a number of the routes.

It objected to BA/IAG taking over three London routes to Dublin, Cork, and Shannon for three years using Ryanair slots in Gatwick and Heathrow. It also refused the idea of Ryanair giving BA an option to acquire the slots when Ryanair decided to dispose of them. Ryanair would also offer slots to other European carriers.

The commission said these plans would see Ryanair remain dominant on the routes and BA would possibly exit after the three years. At any rate, BA had a different relationship with Ireland — its routes from here are mainly to deliver passengers to its hub in Britain for onwards flights.

The commission said it could not speculate on whether Ryanair could have produced other solutions that would have solved the problems. But it is difficult to conclude anything other than what is needed is a third company, akin to Ryanair and Aer Lingus, based in Ireland, operating a full commercial passenger service, competing with them in every respect.

Then, perhaps, a takeover of one of the airlines by another — still leaving the country with two competing airlines — could be a possibility, sources said.

The commission was damning in refuting Ryanair’s claims that the acquisition would generate synergies and savings that would benefit consumers. It did not find any significant evidence of this “beyond Ryanair’s mere statements”.

On the contrary, the commission said “Ryanair would have eliminated its closest competitor on a significant number of routes”, and created a monopoly on 28 routes, a dominant position on 11 routes currently serviced by charter companies, and on a further seven routes where alternatives are offered by other scheduled carriers.

The commission makes the point that it did not just examine Ryanair’s four sets of proposals in response to its objections, but the final three were also market-tested with consumers, tourist agents, and stakeholders, and Ryanair was informed of the results each time.